4 strategies for McDonald's management

ScottRothbort

Scott Rothbort has over 30 years of experience in the financial services
industry. He is the founder and president of
LakeView Asset Management, LLC,
www.lakeviewasset.com, a registered
investment advisor specializing in customized, separate account management for
high-net-worth individuals. In addition, he is a Professor in the Departments of
Finance and Economics at the Stillman School of Business of Seton Hall
University and the publisher of The LakeView Restaurant & Food Chain Report, www.restaurantstox.com, a
newsletter focusing on investment and trading ideas in the food, restaurant and
agricultural sectors. Beyond MarketWatch's Trading Deck, you can read Scott’s
daily My Gut Feeling commentary and follow him during the
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McDonald's
MCD, +0.06%
has had a rough year so far, declining 15% since the ball dropped in Times Square.

Same-store sales for the global, quick-casual, restaurant chain have been under pressure. Third-quarter earnings missed analysts' consensus estimates by four cents. For the entire company, the October sales decline of 1.8% marked the first decline in sales for McDonald's in nine years. Total sales in the U.S. declined for the month of October by 1.4% and same-store sales slipped by 2.2%.

This lackluster performance may have been the reason that the head of U.S. operations, Jan Fields was replaced with another longtime McDonald's executive, Jeff Stratton, a few days ago.

Part of the disappointing earnings I believe can be traced to the strength in the dollar versus currencies in its areas of operation. I would also state that McDonald's was facing some very strong same-store sales from 2011, thus presenting a high bar to jump in 2012.

Coming into 2012, I realized that McDonald's would be facing a challenging operating environment beyond the same-store sales issue, such as: a slowdown in its fast growing Chinese market; a certain European recession; and, a lack of new menu changes on the horizon.

As a result, I sold about 20% of my holdings in the company's stock at just over $100 in January of this year. This was the second time I have taken a bit of the stock off the table. I have held the stock personally and for clients since the selloff on Christmas Eve day 2003, the day of the “mad cow” scare, and continue to do so.

So now that I have discussed what McDonald's has endured in 2012, I want to focus on what McDonald's can do to get back on track. Consider this an open letter to Donald Thompson and his management team. Here are my four suggestions.

1. GET INTERNATIONAL

We already know that McDonald's has extensive operations throughout the world with a large presence in China, Japan, Australia, Europe and Latin America. The Latin American operations are all under the control of a regional franchisee, Arcos Dorados
ARCO, +0.60%

So I am not saying that McDonald's needs to expand internationally. Rather it needs to satisfy the yearning for international tastes at home here in the United States.

The company made a strategic decision in 2006 to divest itself of its majority holding in Chipotle Mexican Grill
CMG, -0.18%
In retrospect, I think that McDonald's should have kept that operation.

Redesigned menus met the demand for healthier quick service meals in the last decade by introducing salads, more chicken dishes, wraps and other items.

Now I believe McDonald's needs to spice up its menu by developing new offerings or differentiating its existing menu items to incorporate Tex-Mex/Latin; Oriental; Indian and Russian flavors in a more aggressive and permanent manner.

2. VERTICAL ACQUISITIONS

As I mentioned before, I thought that the company should have held its investment in Chipotle. Similarly, I believe that McDonald's didn't give Boston Market enough attention and patience.

McDonald's also provided the seed money for Coinstar's
US:CSTR
Redbox movie and game rental kiosks. As you can see, the company wasn't afraid of investing in new or interesting concepts in the past. I think that it is time that McDonald's uses its strong balance sheet and cash flow to do so again.

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